Should I invest in this share? Flashcards
What is earnings per share (or EPS) and why should I be interested?
Earnings (net profits) attributed to ordinary shareholders
DIVIDED BY
No. Ordinary shares in issue
This shows what each share is actually earning. It also enables investors to see what trends there are i.e. is it an improving picture or not?
Generally speaking, the higher the ratio, the better.
What is dividend cover and why should I be interested?
Earnings per share
DIVIDED BY
Dividend per share
It indicates how sustainable dividends are by showing how many years dividends could be paid by the company when paid out of the current earnings.
Dividend cover of 2 or more is seen as healthy; less than 1.5 indicates the potential growth prospects for the business / ability of the business to re-invest.
Generally, the higher the ratio, the more attactive the share.
What is the payout ratio and why should I be interested?
Dividend per share
DIVIDED BY
Earnings per share
It is expressing the ‘dividend cover’ in the other way as the formula for dividend cover is reversed.
It indicates how much of a company’s profits have been distributed when compared with earnings generated
A payout ratio of 0.5 or less is seen as healthy i.e. Only 50% of the profit available was distributed
Generally, the lower the ratio, the more attactive the share.
What is dividend yield and why should I be interested?
Dividend per share x 100
DIVIDED BY
Current share price
It shows the return or how much ‘income’ the share will produce as a %. Obviously, this ignores any capital growth.
The general rule is the higher the ratio, the more attractive the share.
What is the **price earnings ratio (known as the P/E ratio) **and what does it tell us about a company?
Current share price
DIVIDED BY
Earnings per share
It shows how profitable a share is, i.e. how much it pays out as a % of the current price and how well it can continue to generate earnings. A high P/E is, generally speaking, a good indicator as it shows how optimistic or otherwise the markets are. It isn’t always safe to compare the P/E ratio of different firms in different sectors.
What is the price earnings to growth ratio (known as the PEG ratio) and what does it tell us about a company?
Current share price / Earnings per share
DIVIDED BY
Expected Earnings Per Share Growth
It is a more realistic measure of the P/E ration as it considers the expected growth of the companies earnings, A number of less than one indicates that the shares are potentially attractive. This measure can also been misleading as the Expected Growth Earnings figure is given by the company.
What is a liquidity ratio and what does it tell me?
Current assets - stock
DIVIDED BY
Current liabilities
This shows how easily a company can meet a sudden cash call. In other words, how well will it stand up if there is a crisis or emergency.
In this case, the higher the ratio, the more able it is to repay its short term debts.
What is interest cover and why should I be interested?
Profit before interest and tax
DIVIDED BY
Gross interest payable
It shows how well a company can repay debt. It shows how many times interest payments are covered by gross profits.
Note: this does not apply to an ordinary share. It applies to preference shares which pay interest instead of dividends.
Gernerally speaking, the higher the ratio, the better.
What is return on equity (ROE) and what does this tell us about a businesss?
Net profit (after tax and preference dividends have been paid)
DIVIDED BY
Capital and reserves (shareholder equity)
It shows the percentage return the company is achieving on the amount of funds provided by shareholders.
Generally speaking, the higher the ratio, the better.
What are the key aspects of a preference share?
They pay a non guaranteed, fixed dividend
They are ranked ahead of ordinary shareholders for both income and return of capital
They only offer voting rights if the preference share is ‘cumulative’ and is in arrears
